Being big has its advantages in the initial public offering business, as in so many others. IPOs brought out this year by the investment banks with the largest IPO businesses generally outperformed the broader IPO market, according to data from IPOFinancial.com of Millburn, New Jersey.
The best performance came from the 18 US IPOs on which Goldman Sachs Group Inc served as lead underwriter. They racked up an average gain of 39.4 percent, helped by the strong rise of Chinese Web search engine company Baidu.com Inc, shares of which closed Thursday at $68.85, up 155 percent from their $27 IPO price.
That gain greatly outpaced the 14.8 percent average increase for the 212 US IPOs in the 52-week period ended Thursday, which was the time period IPO Financial analysed. The ranking includes only deals on which the underwriter in question served as lead bookrunner and only includes banks that served as lead bookrunner on five deals or more.
David Menlow, president of IPOFinancial, said the generally strong performances reflect the underwriters' efforts in developing pipelines of potential IPOs in hot industries.
Baidu's out-sized gains provided Goldman Sachs with a big leg up over its nearest rival, UBS AG, which saw its nine offerings turn in average gains of 30.1 percent.
"The underwriters have done a masterful job of shaking the tress or the bushes to get the right deals," he said. "But in looking at the performance of each of the underwriters, investors should not confuse luck with brilliance."
Just as Baidu's rise boosted Goldman, the meteoric plunge of commodities trading firm Refco Inc took a heavy toll on its lead bookrunner, Credit Suisse First Boston, a unit of Credit Suisse Group. CSFB's 15 IPOs turned in an average gain of 5.9 percent, badly hurt by Refco's 97.4 percent slide from its $22 offering price to its Thursday evening level of 58 cents on the Pink Sheets.
Refco filed for bankruptcy in October following charges that its then-CEO hid $430 million in debts prior to the company's IPO.
The worst performance among the top underwriters came from Bear Stearns Cos. The five companies it brought to market have turned in combined gain of 1.5 percent. Shares of one of them, biopharmaceutical company Favrille Inc, closed Thursday at $4.04 on the Nasdaq, off 42.4 percent from their $7 IPO price.
IPO experts said pricing is a delicate dance for the syndicate desks. An IPO's price needs to be high enough to satisfy the owners who are selling the company, but must leave some room for the stock to rise if an underwriter is going to keep its buyside customers interested in IPO shares.
"I always tried to get businesses telling the issuer that we're looking for the highest sustainable price, not the highest price," said Bruce Foerster, chief financial officer of Aurora Capital Inc, of Sunrise, Florida, who previously worked in the equity capital markets operations of Paine Webber and Lehman Bros.
"The worst thing of all is you buy 1,000 shares of ABC Widgets at $20, it opens at $30, you buy more and it closes at $19," Foerster continued. "Then you think, 'They got me, the game is rigged.'